Thursday, February 10, 2011

Investment guru Doug Casey in this conversation gives a trenchant insight of the mechanics of corruption

On his definition of corruption: (all bold highlights mine)

a betrayal of a trust for personal gain

On the difference between private and public corruption

One can find corruption within corporations, as when directors betray their duty to the shareholders for personal gain. Or churches, as when priests, for pleasure, betray the trust of the young people under their guidance. Even a parent can be corrupt, if he fritters away on high living money intended to be left to his kid. But those types of corruption stem from personal weakness and personal vices. They're horrible – but corruption in government is much worse.

Only government can impose its will on you by law, and back it up with a gun. And with other sources of corruption you can – theoretically at least – go to the government for redress. But when the government is corrupt, it's hard to get the state's right hand to cut off its left. Not only that, but government – partly because its essence is force – concentrates corruption, and incubates it. If a company or church is corrupt, one can quit them. But citizens are stuck with their government – and they'll probably keep paying taxes to it regardless of their feelings toward it. A discussion about corruption is necessarily a discussion about government as an institution.

On the roots of public corruption:

As Tacitus said in the second century A.D., "The more corrupt the state, the more numerous the laws." It's absolutely predictable that as all these governments around the world – and I mean all of them – respond to the ongoing crisis with an ever-accelerating onslaught of new laws, there will be more and more corruption – and frustration with that corruption.

Tacitus was right. But he could just as accurately have said, "The more numerous the laws, the more corrupt the state," because lots of laws engender lots of corruption. In other words, corruption isn't the problem. The state and its laws are the problem, to which corruption is an unsavory and unaesthetic – but necessary – solution. Laws create corruption, and corruption engenders laws.

Every time a legislature convenes, they pass more and more laws. That's all they do, all day long. So the body of laws and the accompanying volumes of administrative regulations and procedures to implement them is constantly growing – the whole world over. Legislatures are horrible and dangerous things that bring out the absolute worst in the people who inhabit them.

Laws and regulations are like barnacles on a ship. They keep growing and growing, weighing the ship down, slowing it down. If they aren't scraped off from time to time, they will threaten the ship's structural integrity.

On the efficacy of anti-corruption laws:

Those laws necessarily have the opposite effect of what's intended. By raising the stakes, they just raise the level of bribery required, resulting in even more severe corruption. Like everything governments do, it' not just the wrong thing to do, but the exact opposite of the right thing to do....

The only way to fight official corruption is to reduce the amount of legal control of officials, particularly their regulatory power over the economy. If there were no government regulators, inspectors, assessors, auditors, and so forth ad nauseam, there'd be no reason for businesses and consumers to bribe them to get the hell out of the way.

On how free markets are self regulated:

There are many market forces that regulate business activity – and more broadly, cultural forces that regulate interactions between people. In the marketplace, reputation is a very powerful force. So is competition. And so is liability – it's a powerful negative incentive. More broadly, culture is a very powerful regulatory force, which is to say, peer pressure, moral opprobrium, and social approbation restrain people from being naughty far more than fear of police does. And there are also private institutions that have powerful regulatory influences, such as churches, Rotary, Lions Clubs, and the like.

On the public’s wrong impression on the significance of government:

People somehow imagine that because government regulations are backed with the iron fist of the law, they work better, especially when the matter is considered vital. This is simply incorrect. It shows an ignorance of both history and of the state of the world today. Regulation usually becomes so corrupt that it ends up doing the opposite of its intended effect. A business that pays officials to look the other way can do even worse things than they would do if there were no officials, because the official seal of approval falsely tells the people that all is well. That's why the SEC should be called the "Swindler's Encouragement Commission" – because it lulls investors, especially the novices, into feeling they're protected.

On the roots of regulatory corruption:

Strict regulation leads naïve people to think, "Everything is under control." That has two important effects. One, it makes them irresponsible – a belief that they don't have to concern themselves. That general attitude then permeates the society. Two, regulation always creates distortions in the market. It's like a lid on a pressure cooker. Everything looks under control until the whole thing blows up.

That's what lies at the root of the concept of "black swan" type unexpected events. The black swan lands when the amount of corruption necessary to evade laws becomes as onerous as the laws themselves.

On why corruption is a good thing:

There's good news and bad news in this.

In itself, corruption is a bad thing – it shouldn't have to be necessary. As I touched on earlier, insofar as it's necessary, it's also a good thing. If we can't eliminate the laws that give rise to corruption, it's a good thing that it's possible to circumvent these laws. The worst of all situations is to have a mass of strict, stultifying, economically suicidal laws – and also have strict, effective enforcement of those laws. If a culture doesn't allow people to work around stupid laws, that culture's doom is further sealed with every stupid law passed – which is pretty much all of them.

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